The US currency continues its victorious march, leaving behind the euro and other competitors. At the same time, the euro is making a lot of efforts to slow down a serious and prolonged fall. Against this background, the greenback's tasks are to maintain the gained positions and advance to new heights.
The US currency hit a new 20-year high on Tuesday, June 14. Its achievements stand out amid the losses of other currencies. The reason is investors' expectations of an aggressive rate hike by the Federal Reserve and a possible recession. Recall that on Monday evening, June 13, the dollar strengthened amid another wave of sell-off in the markets of risky assets. In the current situation, after reports of a new round of inflation in the US, investors are seriously afraid of a recession.
Against this background, the dollar index (USDX) is gaining strength, which demonstrates the attitude towards the basket of currencies of six countries - America's trading partners. Its steady growth began on Monday evening and continued the next day. This indicator exceeded 105 points for the first time since December 2002.
At the beginning of the week, the correctional dynamics of USDX was recorded on the US currency market after it reached 105 points a day earlier. The greenback is supported by expectations of another increase in the Fed's key rate amid high inflation in the country. The current situation undermines the euro's position, which is hardly kept afloat. The EUR/USD pair hovered near 1.0436 on Tuesday morning, June 14, trying to overcome the pull of the downward spiral.
"Swings" in the dynamics of the euro and the greenback are due to high inflation in the American and European territories. US annual inflation accelerated to 8.6% in May, breaking a record since 1981. This was an unpleasant surprise for the markets, which had expected the pace of consumer price growth to remain close to April's 8.3%. The current situation has prompted economists to urgently revise their previous forecasts for the Fed's key rate. Many analysts expect the Fed to accelerate the monetary policy tightening cycle. According to the new calculations, this week the central bank will raise the rate by 50 bp, and the next round of increase by the same amount will take place in July.
The Fed will make another rate decision on Wednesday, June 15. At the same time, investors fear that in the face of galloping inflation, the central bank will act aggressively, and this will plunge the US economy into recession. Most analysts (68.7%) expect a 50 bp rate hike, while the rest assume that the Fed will raise the rate by 75 bp at once. The implementation of the last scenario will be another driver for the rise of the dollar index, experts are certain.
The current surge in inflation puts the monetary authorities in a difficult position, hindering the implementation of their main task - preventing price increases. Earlier, representatives of the Fed admitted that they misjudged the scale of inflation. However, now the main thing is to find ways to rectify the situation, experts remind. "The huge problem is that the Fed doesn't know how much monetary tightening is needed. The results of the central bank's actions are visible only after a long time," emphasize the currency strategists of the bank Societe Generale.
For now, the US central bank will have to catch up while holding back long-term inflationary expectations. The American economy is in danger of a recession that could lead to the loss of millions of jobs. If a recession is avoided, the US economy will fall into the trap of stagflation, which is characterized by weak economic growth amid high inflation. This situation may drag on for the next two years, experts warn.
In the current situation, market participants are also bewildered by the European Central Bank's inconsistency in tightening monetary policy. The next round of inflation in the EU and the unwillingness of the ECB to speed up measures to curb it are worrying investors. Recall that in May, consumer prices in the eurozone soared by 8.1% in annual terms. This is well above the 2% target set by the central bank.
According to a number of analysts, ECB President Christine Lagarde is not sufficiently competent in the formation of monetary policy. At the end of May, she said that the increase in rates would be gradual, since the countries of the European bloc are not facing excess demand. However, last week she changed her tone, confirming not only the likelihood of a July rate hike, but also the launch of a September round of monetary policy tightening (with a possible rate hike of 0.50%). The inconsistency of Lagarde's actions was criticized by Peter Praet, the former chief economist of the ECB. "If you want to be a hawk, then you need to be consistent and clearly formulate your goals," Praet emphasized.
In this situation, the US and European currencies are under attack. The latter suffers the most, analysts believe. The current dynamics of the EUR/USD pair will be affected by the statistical data on the final estimate of inflation in Germany, which will be published this afternoon. According to preliminary estimates, the annual inflation rate in Germany accelerated to 7.9% in May from the previous 7.4%. Against this backdrop, Scotiabank economists expect the EUR/USD pair to head to a yearly low of 1.0350. "Risk aversion, widening yield spreads, more hawkish Fed sentiment and concerns about the eurozone's outlook offset the ECB's rate hike," the bank said.
According to currency strategists at Scotiabank, the euro's immediate growth outlook has narrowed sharply. In the short term, the single currency will remain under pressure, and the new target for the EUR/USD pair will be 1.0350. Against this background, the greenback wins, but the euro still has a chance to recoup, analysts believe.
